Finding Bad Cash Flow Notes

No one has ever asked us,

“How do I find BAD note deals?”

The funny part is, that as a note buyer, we see more bad deals than we do good ones.

But isn’t that just the nature of the business? Yes, but it doesn’t need to be so.

When beginners start in the note business they spend an inordinate amount of time on what we consider “bad” (or at least extremely “challenging”) deals.

These are mortgage and trust deeds that will most likely never be purchased. They include things like: Read more

Note Buyers Demand Original Promissory Note

In an effort to hang on to homes in foreclosure many owners are telling banks to, “Show Me the Note!”

It looks like Wall Street lenders are learning something private note buyers have known for years…

When buying and selling mortgages or trust deeds you need to get the original promissory note!

Put it in a safe place where it won’t get lost and make sure it comes with endorsements and assignments that follow the chain of ownership. You know, something that proves you own what you say you own.

It’s one of those things you don’t think about until you need it. One of those times happens to be when the buyer or borrower stops making payments.

In order to foreclose a Note Buyer must prove:

• the existence of the note
• the party being sued for foreclosure signed the note
• they are the owner or holder of the note in due course; and
• a certain balance is due and owing.

What does that mean in plain English?

Well, the promissory note is an obligation to pay, kind of like a check. If you want to cash the check you have to present it to the bank. If you want somebody else to get payment then you have to endorse and sign it on the back.

As banks bought and sold mortgages during the securitization craze many notes were lost or transferred without accurate paperwork. Lenders would then rectify the problem by substituting an affidavit of lost note. For many years the courts would routinely overlook missing paperwork or accept the affidavits when granting foreclosures.

But then the bubble burst, the real estate market came crashing down, and foreclosures skyrocketed. Disgruntled homeowners and consumer advocates started demanding lenders produce the note in an effort to stop foreclosure.

This movement scored its first big success in Ohio back in 2007 when a federal judge denied 14 foreclosures by Deutsche Bank National Trust Co. because the bank didn’t produce the original notes.

Since that time homeowners and attorneys have used this delay tactic at an alarming rate. They’ve also extended claims to other mishandled paperwork, contributing to the temporary foreclosure freeze announced by Bank of America, GMAC, and Chase in October 2010.

So what does this all mean to the cash flow business?

If you are a Seller that accepts owner financing be sure to protect yourself by keeping the original note in a safe place. If you are a Note Broker, verify the seller or a third party servicing agent is in possession of the document so it can be produced at closing. Note Investors will continue to be diligent in requiring the original in order to buy mortgage notes.

Click Here for a list of Note Buyers and Owner Financing Specialists!

Real Estate Note Investing: “Wow, That Sounds Risky!”

That is the reaction I generally get when I tell people what we do. Or sometimes they will respond with “Oh, that’s got to be tough right now.”

Perhaps it is my answer, but mostly it is because many people’s perception has been clouded with everything they hear and read on the news about mortgages and foreclosures over the past few years. Read more

Top 5 Ways to Buy Mortgage Notes

One of the things that make buying and selling notes so appealing is the multitude of ways an investor can purchase a note.

Frankly, you are limited only by your imagination. Well, maybe imagination and reaching a desired yield.

Here is a quick look at calculating the cash flow business that even those with math phobias will like.

The Top 5 Ways to Buy Cash Flow Notes

1. FULL – A full is just that. Buying the entire note.

If the seller has 322 payments remaining, the investor purchases all 322. The full purchase is the most popular way to buy mortgage notes.

Even though it may not be the best choice for a seller, many sellers just want to be completely done with the note.

2. PARTIAL – Anytime an investor purchases something other than a Full it’s referred to as a “Partial.”

Typically when someone uses the term “Partial” we are talking about purchasing the next immediate “X” Number of Payments. This can be any number of payments.

The most common partial purchases are 60 months, 120 months, and 180 months.

If the investor purchases the next 60 payments, the promissory note reverts back to the seller on payment 61. The seller, at their discretion, may choose to sell more payments or keep the remaining payments.

3. PAYMENTS ONLY – This type of partial purchase involves a balloon mortgage note where the seller is due a large balloon payment at the end.

For example, the note holder is to receive 120 more monthly payments and then a balloon payment of $50,000.

“Payments only” would be when the investor purchases just the remaining 120 monthly payments but none of the balloon payment. The seller of the note would retain future possession of the balloon.

4. SPLIT BALLOON – Very much like the “payments only” option except in this case the investor purchases all of the monthly payments (120) and a portion of the balloon.

For example, the investor purchases all the remaining 120 payments and $30,000 of the balloon payment.

This would leave the seller the remaining $20,000 due of the balloon payment.

The seller and investor have effectively “split” the balloon ($30,000 to the investor, $20,000 to the note holder).

5. SPLIT PAYMENTS – In this type of partial, the investor purchases a portion of each monthly payment.

It is typically reserved for when the seller of the note is receiving a sizeable amount each month (although it really could be implanted at any time).

For example, let’s say the note holder is due 145 payments of $2,500.00 each month.

The investor may elect to purchase $1,750 of each month. This would leave the remaining $750.00 each month for the seller of the note.

Typically the payer mails the full $2,500 each month to the investor and then the note investor forwards the $750 to the seller. This avoids confusion among the payer of the note as well as helps the investor make sure the note is being paid in full each month.

The “amount” of each monthly payment that is purchased is completely up to the agreement of the investor and seller. It just needs to be worth the extra handling efforts.

MAKING THE CHOICE

As you can see, there’s more than one way to buy mortgage notes. Matter of fact, there may just be literally hundreds of ways to purchase notes since many of the methods can be used in combination with each other (including Reverse and Split Disbursement partials)

As long as the deal can fit into the best financial calculator, there is a mathematical way to purchase the note.

So which method is best?

The best method is dictated by the needs of the note seller and how best to meet that need while still protecting the yield and exposure requirements of the investor.

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Making Money Using “Buy Full – Sell Short”

One of the most powerful wealth building techniques in the cash flow industry is the “Buy Full – Sell Short” strategy. Capitalizing on the power of compounding interest and the time value of money, it enables note brokers to own rights to future note payments with little to no money of their own. Read more